It has been a turbulent year. The US-China trade war has seen the US and China imposing tariffs on hundreds of billions worth of each others’ goods. Then came the outbreak of Covid-19, which has now become a pandemic.

In a surprising move by the US Federal Reserve, they cut their interest rates ahead of scheduled policy meetings in an attempt to contain the economic impact caused by Covid-19. This emergency interest rate cut is the first time in 12 years, since the global financial crisis in 2008.

This resulted in a dip in SIBOR, which stands for Singapore Inter Banks Offered Rate. SIBOR is the benchmark interest rates at which banks lend unsecured funds to one another in the Singapore wholesale money market.

SIBOR plunged in 2008 and took a long time to recover. Property owners have enjoyed attractive SIBOR-pegged interest rates for a decade. SIBOR rates started to rise from 1.25% in Feb 2018 to a high of 1.89% in July 2019. This was then the US Fed started to cut rates for the first time since 2016.

2019 was supposed to be the year where SIBOR was expected to recover. Many property owners, fearing the hike in interest rates, signed onto fixed rates as high as 3% in the first half of 2019. However, the SIBOR rates dived to 1.12% as at 13 March 2020 and is expected to continue downwards.

So, with these plunging SIBOR rates, is it a good time for property owners to refinance or reprice your mortgages?

Let’s look at the factors you should consider before making the move.

Interest Rate Outlook

Looking at the historical chart since 2014, even if interest rates were to buck the trend and increase in the medium term, it is unlikely to hit 3.5 to 4% in two years.

But will the interest rate continue to drop?

Property owners who hold the view that rates will drop further should opt for floating interest rates. Even if interest rates start to increase, it will not spiral within the usual 2 years lock-in period.

For those who prefer a fixed rate home loan, the current fixed rate at around 1.75% is attractive.

I met up with a client, Mr Tan, and did a calculation on his mortgage loan interest he is paying. Mr and Mrs Tan have a 4 bedroom property, with an outstanding loan of $800,000 spread over 20 years. They are currently paying 2.8% interest.

Citibank is offering an attractive SIBOR-pegged interest rate package at SIBOR + 0.35%. The SIBOR rate is at 0.98%, thus the interest rate he has to pay is 1.33%.

At 1.33%, Mr and Mrs Tan needs to pay monthly instalment of $3,798. If they did not refinance, they will be paying $4,357 every month. That is an additional of $559 per month and a whopping $6,708 per year!

Lock-in period and charges

The legal fees for refinancing is around $2,000 to $3,000. However, some banks will offer legal subsidies to partially or fully offset these fees.

There will also be valuation charges, which costs between $150 to $1,500.

Bank mortgages typically come with 2 or 3 years lock-in period. If property owners refinance before the lock-in period ends, they will face a penalty, typically at 1.5% of the outstanding loan. It is thus important to time when you can refinance so as to avoid the penalty charges.

Refinancing vs Repricing

Refinancing is defined as switching your mortgage loan from one bank to another.

Refinancing involves higher costs. There will be legal fees and costs of valuation, though most of the time banks will subsidise the legal and valuation fees.

Refinancing also involves longer time and is a more tedious process. You have to submit your income and debt documents, and meet the Total Debt Servicing Ratio (TDSR). This means your monthly debt obligations cannot exceed 60% of your monthly income.

Repricing is defined as switching your mortgage loan within the same bank.

Repricing involves lesser costs. There is usually only a fixed conversion/admin fee. These range between $200 and $800.

Many mortgage loan packages come with a one-time repricing so you can change within their current loan package without incurring much cost.

Short Term Options

Most mortgage loan packages come with a lock-in period. There will be a penalty of 1.5% of the outstanding loan if you redeem the loan within the lock-in period.

Owners who are intending to sell their property within the next few years should consider this in their refinancing decision.

Now, what are the types of mortgage rates typically offered by the banks?

Fixed Rates

Fixed rate, like the name implies, has rates fixed for the term you opt for, typically between 1 to 5 years.

Property owners who like stability should go for this. During times when SIBOR is trending upwards, property owners prefer fixed rates for security. Fixed rates is usually higher than floating rates by around 0.3% interest.

One thing to note is banks do not offer fixed rates for building under constructions (BUC). Owners whose properties are under construction can go for the floating rates package before switching to fixed rates after their properties are completed.

Board Rate

Board Rate has a long history. Long before bank rates are pegged to SIBOR or FHR, there is only one kind of rate. And that is Board Rate.

Board Rate is determined internally by banks. There is a lack of transparency as we do not know how it is fixed and what benchmarks are used.

SIBOR Pegged Rate

Many mortgage loan packages in Singapore are pegged to the SIBOR. It is considered the most transparent packages.

How does SIBOR pegged rates work?

If you take up a SIBOR pegged mortgage loan package, your interest will be made up of:

SIBOR + Spread = Interest Rates

The spread is a percentage which the banks add on to the SIBOR rates to form the interest rate which property owners pay.

So if the SIBOR is at 1.2% and the spread is 0.7%, the interest rate you will be paying is 1.9%.

History has shown that the lower the SIBOR is, the higher the spread will be.

In fact, after US Fed announces the emergency interest rates cut on 15 March 2020, banks are already increasing the spread for their mortgage loan packages.

Citibank’s SIBOR-pegged rates has its spread increased from 0.18% to 0.35% within the month of March.

HSBC has also increased its spread from 0.25% to 0.45% in the same month.

Fixed Deposit Home Rate

Fixed Deposit Home Rate (FHR) has its interest rate pegged to the interest rate of the bank’s fixed deposit rate. It is accompanied by a spread, so your interest rate is made up of:

FDR + Spread = Interest Rate

For example, if the FDR is 0.9% and spread is 0.8%, the interest rate you will be paying is 1.7%.

Critics has said that FDR is not transparent, since the interest rate is decided by the bank.

However, fixed deposit rates are ultimately controlled by Monetary Authority of Singapore (MAS) to keep FD rates in control. Banks are also required to publish their rates.

Also, as FDR is tied to fix deposits, bank will also need to pay more interest to their fixed deposit account holders if they increase their FDR.

Conclusion

Being a firm believer of not paying more than what you should be paying, I always advise my clients to do refinancing or repricing.

Refinancing, just like health checkup, should be a routine exercise!

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